Kasich’s oil and gas tax proposal leaves over $1 billion on the table

Wednesday, February 13th, 2013 by Ben Peyton

Governor Kasich’s budget raises the rate of Ohio’s severance tax, charged when drillers extract oil and natural gas from Ohio’s shale, but would preserve our tax rate as one of the lowest among all oil and gas producing states.

According to the administration, these changes will raise $200 million in new tax revenue over the next two years, but is dwarfed in comparison to the $2.9 billion in new sales taxes Ohioans are being asked to pay in the budget, resources that will support another income tax cut that will mostly benefit the wealthiest Ohioans.

It’s important for policymakers to consider whether the new tax rate is sufficient.Based on production estimates from the Ohio Department of Taxation, we attempted to compare the estimated revenue from Governor Kasich’s proposal to what Ohio could collect at varying tax rates, including those in place in other oil and gas states.

As shown in the following chart, we used the administration’s forecasts for oil and gas production over the next four years using different severance tax rates that charge a percentage of the market value of the oil and gas. For each tax rate, we looked at what could happen to tax collections in high and low market price scenarios. We also compared Ohio’s proposed rate of 1 percent for natural gas and 4 percent for all other resources to that of Texas, a major oil and gas hub, which charges 7.5 percent and 4.6 percent, respectively, for gas and oil.

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Our findings show that over four years, the administration’s proposal is estimated to collect $920 million in new revenue, compared to $1.7 to $2 billion in new revenue if it applied the Texas rates. That represents nearly $1 billion in lost revenue for Ohio, money that could be put to work in Ohio restoring deep cuts to schools and local communities but will instead result in extra profit to mostly out of state oil and gas companies who are extracting Ohio resources.

The administration previously claimed that raising the rate any higher would make Ohio less competitive when compared to other states. Over the weekend, however, Governor Kasich seemingly backtracked in an interview in which he argued that North Dakota’s severance tax rate — much higher than what he is proposing — has not made them less competitive for drilling.

And yesterday, testifying before the House Finance Committee, Tax Commissioner Joe Testa claimed that market prices of oil and gas — and not severance taxes — are what will drive oil and gas production rates in Ohio.

Ultimately, policymakers must decide on a severance tax rate that captures a fair contribution from industry without discouraging investment. To date, the administration has not provided evidence to suggest that a rate higher than what they’ve proposed would result in diminished interest in Ohio shale. Lawmakers should amend the governor’s proposal to impose a severance tax rate similar to that in place in Texas and other oil-producing states.